Brad Setser

Brad Setser: Follow the Money

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Gone to the beach

by Brad Setser
August 25, 2008

I am taking a few days off. Rachel Ziemba and Christian Menegatti — my former colleagues at RGE — will be guest blogging here. I should be back on Labor Day.

9 Comments

  • Posted by Simon

    Enjoy! You deserve it.

  • Posted by guest

    I’d like to see you in Coney Island…

    But where is your beach?

  • Posted by Dave Chiang

    It’s obvious to the rest of the world that the Fed panders exclusively to the narrow economic interest of Wall Street. Under Bernanke’s “No Hedge Fund Manager Left Behind”, everyone on Wall Street gets a taxpayer bailout. Free market capitalism replaced by Fed socialism for the politically connected.

    Ex-Bank of England official slams Fed
    http://business.smh.com.au/business/exbank-of-england-official-slams-fed-20080825-41hh.html

    Former Bank of England policy maker Willem Buiter sparked the biggest debate at the Federal Reserve’s annual mountainside symposium, saying the central bank pays too much heed to the concerns of financial institutions.

    ”The Fed listens to Wall Street and believes what it hears,” Buiter said in a paper presented to the Fed’s conference in Jackson Hole, Wyoming. ”This distortion into a partial and often highly distorted perception of reality is unhealthy and dangerous.”

    The Fed has provoked criticism from some officials in the US and Europe by trying to end the yearlong credit crisis through an expansion of lending. The steepest interest-rate cuts in two decades risk stoking inflation, while the Fed has been too generous in aiding banks, said Buiter, 58, a founding member of the Bank of England’s independent rate-setting board in 1997.

    In addition to rescuing Bear Stearns from bankruptcy, the Fed created a program to swap Treasuries for mortgage bonds, opened up lending to Wall Street firms and reduced the premium for direct loans to commercial banks.

  • Posted by statingtheobvious

    Why is Dave Chiang such a douche?

    Have fun Brad

  • Posted by Rien Huizer

    Brad,

    This looks suspicious, prefering leisure over work. Some European roots, no doubt. When you’r back, all of the world’s problems will have been solved…

  • Posted by flow5

    If one of our large “banks” in this country could fail, what of the rest? A mis-calculation, or a flawed evaluation, could have diastrous effects on the confidence of the dollar.

    And what proportion of the deposits are owned by foreign corporations? governments?

    Bank failures could eliminate the dollar as the principle transactions currency of the world.

    Why? From the standpoint of foreigners, the losses logically would be attributable, not to ordinary “bank” causes, but rather to a flawed money and banking system.

  • Posted by Ben

    Hi Brad,

    I am a regular reader of your work, have been for several years, and find it useful, insightful, and interesting. Thanks very much for your work, keep it up.

    Have a quick question for you…

    Considering recent moves in the USD-EUR, how much of it is dictated by China? We all know China has MASSIVE FX reserves, mostly in dollars, and we all know that China would like to diversify some of those holdings away from the dollar.

    However, considering Chinese exporters are dependent on both Europe and the US, clearly they have an incentive to manipulate their holdings depending on the condition of those two economies.

    For instance, since the dollar has plummeted, imports to the US from China have slowed. However, since the Euro has strengthened, imports from China to Europe have increased, at least partially offsetting the slowdown in exports to the US.

    My question is, how does China manage this situation? I do not buy the story that domestic consumption in China will save the economy there.

    But now that the Euro zone appears to be slowing dramatically, is China selling Euros and buying Dollars to keep the European economy afloat, thereby stoking demand for Chinese goods?

    In essence they appear to be walking a fine line, almost as a swing market-maker in global currency markets. If the Euro slows too much, and Europe collapses in to a recession, Chinese exports collapse with it with the dollar this weak.

    In that case, the Chinese can sell Euros and buy Dollars to prop up Exports to the US while helping European economies export more. On the other hand, if US appears to collapse, they can sell dollars and buy Euros to prop up the US economy via increased exports.

    How much of this do you see going on? Doesnt it appear that China has a lot of control over the global economy in this instance?

  • Posted by fatbrick

    To Ben’s comment: “In that case, the Chinese can sell Euros and buy Dollars to prop up Exports to the US while helping European economies export more. On the other hand, if US appears to collapse, they can sell dollars and buy Euros to prop up the US economy via increased exports.”

    You just describe a god…I do not believe that anyone has such power.

  • Posted by Cedric Regula

    Ben:
    I don’t think you can do that with a trillion in reserves. Forex is a very, very large market.

    Last couple years the eur/usd has been moving closely on interest rate differentials in the futures market. That is, everyones guess on future central bank interest rates, which are supposed to have something to do with the strength of their economies.